Assume the Position

Friday, April 02, 2004
 
Where's the Oil?

Welcome Kausfiles readers. I see Kaus has another question:

Pherrett takes a swipe at insidious Liberal Bias in Slate's Explainer in passing. ... Speaking of liberal bias, since Pherrett knows so much about oil, maybe he can explain why, if one of the benefits of the Iraq war was supposed to be greater influence over that nation's oil spigot, we are still being jerked around by the OPEC cartel. (Pithier query: Let's pretend this was a War for Oil. Where's the Oil?) ... 10:14 A.M

I guess "Beats me" isn't an acceptable answer, but I don't claim to be especially knowledgeable about the oil industry. However, that won't stop me from taking a stab at the question, even the hypothetical "War for Oil" version that I personally discount.

The short answer: The oil is still in the ground.

The long answer is an explanation of why the oil is still in the ground: I think most everybody underestimated the effect rampant corruption and mismanagement had on Iraq's infrastructure during the sanctions period.

The wretched state of Iraq's oil production capabilities was masked by the original production limits under the sanctions, as well as by Hussein's conceit and deceit. It seems few people were paying attention and knew how hard Iraq's oil industry was struggling just to produce 2.8 million barrels per day before the war. While the reports that Hussein scammed $10 billion from the Oil-for-Food program focus on "smuggling, kickback, and skimming schemes" related to oil sales and the purchase of food and medicine, there should be little doubt that Iraq was also receiving kickbacks on the purchase of substandard oil production and pipeline equipment at inflated prices. Additionally, Hussein's maltreatment and overproduction of oil fields has resulted in long term, if not irreparable, damage to future oil production capabilities:

Rather than trying to match or surpass its prewar oil production level of 2.8 million b/d, Iraq should "cap [oil] production at a maximum 2 million b/d, export no more than 1.5 million b/d, and start immediately on subsurface [work]" to assess and repair damaged reservoirs in its oil fields, said Issam Al-Chalabi, a former oil minister.

Iraqi and US officials "should forget about reaching what [former Iraqi President] Saddam [Hussein] used to do. This should not be the objective. The objective should be to install proper management of the oil reservoirs," said Al-Chalabi Tuesday [Feb 10, 2004] at an annual energy conference in Houston, sponsored by Cambridge Energy Research Associates.

Such considerations were known before the war to those who cared to look, but even some of the most interested (1 MB PDF) underestimated the recovery times: "3.2 to 3.5 million b/d can be reached in the short term."

I don't think anybody who could be taken seriously believed the US would be able to waltz in and turn the spigot and out would pour 4 to 5 million b/d (an amount which OPEC probably couldn't convince its other members to curtail from their own production since the OPEC 10's production has already been exceeding the quota by almost 2 million b/d—only Venezuela and Indonesia produce less than their quota, which exceeds their production capacity; the other 8 are producing over their quotas). On the other hand, although difficulties were expected, I doubt anybody seriously thought the spigot would be stolen by looters, the guy replacing the spigot would be shot, and when the spigot was finally replaced and turned that what would come out of the pipe was a trickle of water and old crude that had been injected from another well.

The oil fields and production facilities were in worse shape than even most pessimists predicted. The level of continuing violence, which hinders all reconstruction activity, is certainly greater than the Administration expected. Iraq is currently incapable of producing enough oil to drive world market prices, so it provides no leverage with OPEC in the short term.

The story may be quite a bit different toward the end of the decade if Iraq avoids civil war, gets current oil production technology, and has a West-leaning government. The very question, "Where's the oil?" expresses common impatience. Fixing more than two decades of war damage, neglect, shoddy repairs with junk for spare parts, and so on, is going to take more than just a year (or even two or three).



Thursday, April 01, 2004
 
On Assignment - Filling the Strategic Petroleum Reserve

Mickey Kaus wants an Explainer on why the Strategic Petroleum Reserve (SPR) isn't full yet. I wouldn't normally bother, but I'd visited the appropriate websites back at the end of 2001 after Bush ordered the reserve to be filled, so I knew they existed and it wasn't hard finding them again. Additionally, the Slate Explainer he mentions has one paragraph that demonstrates some left bias that I find worth pointing out. Here's the assignment:

Assignment: Explainer, Please! John Kerry wants the Bush administration to stop filling the Strategic Petroleum Reserve in order to free up gasoline supplies for consumers and drive down prices. Jeez--Isn't the damn Strategic Petroleum Reserve filled yet? It seems like we've been pumping oil into it since the 1970s. ... Update: Here's a background Explainer on the SPR, which doesn't answer the question. .. 4:22 P.M.

The Strategic Petroleum Reserve Project Management Office website is rather bland and technical. But it does have a link to the Department of Energy's Office of Fossil Energy which has comprehensive material on the Petroleum Reserves (Strategic, Heating Oil, and Naval). Not only does the Fossil Energy site directly answer Kaus' question with a section "Filling the Reserve," it also links to the current inventory and delivery schedule.

The short answer to why the Strategic Petroleum Reserve isn't full is that filling was stopped mostly as a deficit reduction measure in 1994 when the SPR contained something less than 600 million barrels, leaving it a bit more than 100 million barrels short of the maximum capacity of 700 million barrels. Filling wasn't restarted until 1999-2000 to replace 28 million barrels sold in 1996 for further deficit reduction. The decision to completely fill the SPR was made in November 2001.

The longer answer has to do with the function of the Strategic Petroleum Reserve. It is a buffer for periods when there may be an actual physical shortage of crude oil available to US refineries; it was not created to mediate market prices in either crude or refined petroleum products. The corollary to that is that the process of filling the reserve should not perturb crude oil supplies and cause a shortage, so the delivery schedule is slow and flexible. The Mar-Oct 2004 scheduled deliveries range from a low of one million barrels in June to a high of just over six million barrels in April. The average for the eight-month period is about 3.775 million barrels per month. (Note: I emailed the SPR about the "MB" label on their chart, thinking it incorrectly meant millions-of-barrels. It turns out they use the "M" as the Roman Numeral for 1000 and "MM" for one million. After my query they are considering clarifying the label, possibly changing it to "KB" which might not be as confusing.)

Now, about that leftward skewed paragraph in the Slate background Explainer, it says:

The last significant dip into the SPR occurred during Desert Storm, when Bush the Elder ordered a drawdown of 34 million barrels. There have been minor dips into the kitty since then, such as in June of 2000 when the SPR "loaned" 500,000 barrels each to CITGO and Conoco, which were having problems with their tanker fleets. Later that same year, the SPR made 2.8 million barrels of crude available in anticipation of a harsh Northeast winter.

I'd say the "last significant dip into the SPR" was the sale of 28 million barrels in 1996, but that can't be linked to "Bush the Elder." Additionally, the Gulf War sales totalled only 21 million barrels (a 4 million barrel test sale in August 1990 and 17.3 million barrels delivered between February 5 and April 3, 1991); about half the 33.75 million barrel authorization wasn't used because the war was short and the oil markets went relatively unaffected.

Then there is what I take to be anti-oil industry (or general anti-corporate) bias expressed by the scare-quotes around "loaned." The Fossil Energy site has a section detailing releases from the SPR (Emergency and Test Sales - Exchanges - Non-Emergency Sales, also the source for the above Gulf War drawdown info) and here is how it describes the CITGO/Conoco exchanges:

The CITGO/Conoco Exchanges. In June 2000, a commercial dry dock collapsed into the Calcasieu ship channel just north of the Intracoastal Waterway near Lake Charles, Louisiana. The channel served as the primary route used by nearby CITGO and Conoco refineries, two of the largest in Louisiana. The blockage meant that both refineries faced production curtailments in a matter of days if crude oil could not be supplied to them.

In less than 30 hours after being approached by the companies, the Energy Department had made arrangements to exchange oil from the Strategic Reserve to relieve the refineries' supply problems. On June 15, 2000, the Energy Department agreed to exchange 500,000 barrels from the Strategic Reserve's West Hackberry site with CITGO in return for an equivalent value of crude oil from the company after the shipping lanes were reopened (see June 15, 2000, Techline). The next day, June 16, 2000, the Department reached an exchange agreement for the same amount with Conoco (see June 16, 2000, Techline). Crude oil from the Reserve began flowing to the refineries on June 18, 2000.

Within a week, the U.S. Corps of Engineers had reopened the shipping channel, and on July 29, CITGO delivered replacement crude oil back to the Reserve. On August 4, Conoco delivered an equivalent quantity of crude oil to the Reserve, completing the exchange.

One million barrels of crude delivered from the SPR to two refineries and fully replaced in a month-and-a-half, and not because the oil companies "were having problems with their tanker fleets" other than that the shipping channel was blocked and they couldn't reach the unloading terminal. The oil companies were off-loading some crude from the tankers onto barges that could make it around the blockage, but they weren't able to move enough to keep up the refineries' production.

Finally, this post wasn't meant as a Clinton-bashing piece, a Republican administration in the mid-90s might have treated the SPR in the same fashion. It is worth noting, however, that one of the costs of turning the deficit into a surplus during the Clinton years was to cease filling the SPR and the later sell-off of about 5% of the crude then in storage to generate $545 million in revenues. (I don't know whether the sell-off was an Administration proposal or instigated by Congress. I may try to find out.) On the flip-side, the 1999 creation of the Royalty-in-Kind program to directly acquire crude oil for the reserves from oil lessees seems to have been a good idea that came out of the Clinton Administration.


UPDATE - April 3, 2004: W.H. emailed to say he thought the 1996 sales were to reduce gas prices, an idea akin to Kerry's proposal.

From the previously referenced Office of Fossil Energy drawdown information:

Sales to Reduce the Federal Budget Deficit. The second sale of Weeks Island crude oil was directed by Congress in the Omnibus Consolidated Rescissions and Appropriations Act of 1996, enacted April 26, 1996. It required the sale of $227 million worth of oil during fiscal year 1996 to reduce the federal budget deficit. This sale was performed in the same manner as the first. From May 22 through August 5, 1996, the Defense Fuel Supply Center awarded twenty-four contracts to nine oil companies. Deliveries of 12.8 million barrels were made from May 26 through September 17, 1996. This sale yielded $227.6 million in revenue for the U.S. Treasury, or $17.81 per barrel.

The third sale was directed by the Omnibus Consolidated Appropriations Act for Fiscal Year 1997, enacted September 30, 1996, and called for the sale of $220 million worth of crude oil to offset fiscal year 1997 appropriations. On October 3, 1996, the Defense Fuel Supply Center issued a solicitation to prospective offerors requesting bids to purchase West Hackberry sour crude oil, and a small quantity of sweet crude oil in the pipeline connecting the West Hackberry site with the Sunoco Marine Terminal in Nederland, Texas. The first purchase contracts were awarded on October 24, 1996, and by December 5, 1996, the Defense Fuel Supply Center had awarded twenty contracts to seven companies for the purchase of 10.2 million barrels to yield about $220 million in revenue. The first delivery occurred on October 29, 1996 and all deliveries were completed by January 1997.

The sale for FY96 appears in the "Rescissions and Offsets" title near the very end of Public Law 104-134 (H.R. 3019). From the full text:

Notwithstanding section 161 of the Energy Policy and Conservation Act (42 U.S.C. 6241), the Secretary of Energy shall draw down and sell in fiscal year 1996, $227,000,000 worth of Strategic Petroleum Reserve oil from the Weeks Island site.

Here is what the corrected conference report in the Congressional Record of April 30, 1996 says about that sale (emphasis added):

The [conference] managers have agreed to sell $227,000,000 worth of oil from the Weeks Island site of the Strategic Petroleum Reserve (SPR). The Weeks Island site in Louisiana is currently being decommissioned and the oil is being relocated to other SPR locations because of a water intrusion problem. This sale is proposed to offset partially additional funding provided for high priority education programs identified by the Administration. To pay for decommissioning of the site, 5.1 million barrels of the 70 million barrels of Weeks Island oil have already been sold in fiscal year 1996. An additional 12 million to 15 million barrels will need to be sold to realize $227 million in revenues.

[Because the Library of Congress Thomas system generates temporary files, use this link and scroll down to the Page H4285 section and click on the STRATEGIC PETROLEUM RESERVE link to view the above record.]

The late 1996 sale for FY97 was contained in Public Law No: 104-208 (H.R. 3610). This time, instead of selling oil from the reserves to offset appropriations for an unrelated matter, the $220 million sale of crude from the SPR was to offset the operating expenses of the SPR (emphasis added):

For necessary expenses for Strategic Petroleum Reserve facility development and operations and program management activities pursuant to the Energy Policy and Conservation Act of 1975, as amended (42 U.S.C. 6201 et seq.), $220,000,000, to remain available until expended, of which $220,000,000 shall be repaid from the `SPR Operating Fund' from amounts made available from the sale of oil from the Reserve: Provided, That notwithstanding section 161 of the Energy Policy and Conservation Act, the Secretary shall draw down and sell in fiscal year 1997 $220,000,000 worth of oil from the Strategic Petroleum Reserve: Provided further, That the proceeds from the sale shall be deposited into a special account in the Treasury, to be established and known as the `SPR Operating Fund', and shall, upon receipt, be transferred to the Strategic Petroleum Reserve account for operations of the Strategic Petroleum Reserve.

Still, I've found no information to determine whether those sales were proposed as budget offsets by Congress or the Administration. [W.H. was right, however. See the other April 3rd update and the April 5th update below. --lp]


UPDATE - April 3, 2004: W.H. was right, along with Will and Jim in the comments. I was so fixed on thinking "sale" and "gasoline" and knowing there were no "sales" after 1996 that I missed their point. They were all referring to the 2000 exchange:

The 2000 Crude Oil Time Exchange. Even with the establishment of the Home Heating Oil Reserve (above), low distillate inventories in the Northeast continued to alarm the Administration in the fall of 2000. On September 22, 2000, President Clinton directed the Secretary of Energy to enter into time exchange agreements with oil companies for up to 30 million barrels of crude oil (see September 25, 2000, Techline). Under the exchange agreements, companies were to return a like quantity, plus a bonus percentage of similar crude oil, in the fall of 2001.…

The replacement schedule was slipped several times, with the Bush Administration negotiating additional bonus oil to be deliveried for allowing the delays. By December 2002, all but 5.3 million barrels (including bonus oil) had been replaced.

But the exchange was definitely a Clinton Administration initiative less than a month and a half before the election. H. Joseph Hebert's AP article (PDF) in the Laredo Morning Times of September 23, 2000, said:

President Clinton directed the release of 30 million barrels of oil from the government's emergency stockpile Friday. His top energy adviser cited a looming home heating crisis.

[…]

Richardson announced the decision — only the second time that oil from the reserve has been used in response to an energy emergency — a day after Vice President Al Gore called for a drawdown from the reserve.

[…]

The release was immediately criticized by Gore's Republican opponent for the White House, George W. Bush, and by OPEC member Saudi Arabia, which called Clinton's action "an election ploy requested by Al Gore." Bush, campaigning in Florida, said the government reserve "is meant for a national emergency, a national war, a major disruption of supply" and not to influence the market.

Was that release an appropriate response to the situation or just a political maneuver to help Gore's election chances? I don't know. Maybe it was a bit of both. But it certainly couldn't be pinned on "Bush the Elder," and was both a later and more significant release than the Gulf War sale.


Update - April 5, 2004: W.H. came up with a bunch of references that show Clinton accelerated the 1996 deficit reduction sales to lower gasoline prices (emphasis added):

From 1992 to 2000, there were a number of sales or exchanges from the SPR. In two cases, the objective was lowering consumer prices. As part of the 1996 budget bill, the government intended to raise $227mn by selling crude oil from the SPR. Shortly after announcing this plan, however, the Clinton Administration urged the Department of Energy to accelerate the plan in order to temper surging gasoline prices.

At the time, crude oil prices were very high, and 1996 was only the second year of reformulated gasoline (RFG) in the US. Because RFG is harder to make than conventional gasoline, it carried a high premium during the spring as refiners built supplies. At the same time, refinery outages exacerbated gasoline’s strength. All of these factors contributed to high pump prices and public complaints. The Clinton Administration saw the chance to kill two birds, temper gasoline prices and raise money for education, with one stone by selling 13mn barrels of crude oil.

The other references are here, here, here, here, and here; the last one showing the immediate effect:

The price of crude oil fell again today, down 39 cents to $20.81 a barrel. This is due in part to the ripple effect of President Clinton's announcement Monday that the government will soon sell into the market 12 million barrels of stockpiled crude from the Strategic Petroleum Reserves. Experts differ on whether or not the rhetoric or the oil itself is depressing prices. The symbolic effect of both the administration and Republicans in Congress focusing on high gasoline prices during an election year is also seen as dampening the market.



Tuesday, March 30, 2004
 
Unmitigated Malarkey

We agree with the observation by the President's counsel that Dr. Rice's appearance before the Commission is in response to the special circumstances presented by the events of September 11 and the Commission's unique mandate and should not be viewed as a precedent for future requests for public testimony by White House officials.

-- 9-11 Commission Statement (PDF)
March 30, 2004

We applaud the decision of the President to allow the National Security Advisor, Dr. Condoleezza Rice, to testify before the 9/11 Commission. This is a unique event given the extraordinary nature of September 11, 2001. We do not believe Dr. Rice's testimony, before an independent commission, should be seen as setting any precedent, and it should not be cited as setting precedent for future requests for a National Security Advisor or any other White House official to testify before a legislative body.

-- Senate Majority Leader Bill Frist
and House Speaker Dennis Hastert
Joint Statement
March 30, 2004
Yeah, right. Everybody is supposed to pretend it isn't a precedent until the next time an independent commission or any other legislative body wants a White House official to publicy testify under oath.


UPDATE - March 31, 2004: Judicious Asininity sees this as another example of Bush giving the opposition enough rope to hang themselves:

It's sort of neat how Bush got the Democrats and the media to scream for Condi to appear before the 9/11 commission. That screaming drowned out some of Clarke's message and gave the administration and its supporters time to pick apart his credibility. Now Bush can play his best card at the right point in the game.

Rice may well trump Clarke's book and testimony, but I suspect this will turn out to be a precedent that haunts future administrations.



Original content copyright © 2002-2005 Lynxx Pherrett. All rights reserved.